Companies are valued as a function of revenues and earnings, but the price they ultimately command is a function of demand and supply. Over the past few years, online video companies have practically lived in an episode of “Saturday Night Live”, on the one hand facing “lowered expectations” -- but on the other hand realizing that, like Stuart Smalley, We’re Good Enough, We’re Smart Enough, and Doggone It, People Like Us.
After all, more people watch video than ever before. The macro trends are on our side, but at the micro level, there are some structural bumps.
The only company firing on all cylinders is YouTube. Like it or not, its strategists leveraged the DMCA and are now laughing all the way to the bank. YouTube represents the “haves,” while everyone else represent different shades of the “have nots.” Few will openly admit this, but they are doing themselves a disservice by doing so. YouTube is streaming 10 times more videos today than it was 18 months ago. It’s massive.
I’m not talking about traditional media companies who sell ads to Fortune 500 advertisers and extend their offline reach by adding online. They have another problem: online will never replicate offline losses. But for the time being, they can all point to top comScore rankings and growing engagement and revenue, even if the sum of all of their revenues will shrink over the future.
Meanwhile, the percentage of producers who have an owned-and-operated site continues to fall, meaning they are at the mercy of distributors like YouTube to monetize. Publishers that have audience, brand and scale failed to properly invest in video and are now playing catchup, but for most, it’s too late.
However, these companies can buy into the space -- which takes us to multiples. There is no shortage of sellers. Earlier we saw Metacafe sell to Collective, ClevverTV sell to Alloy and Revision3 sold to Discovery Communications. I can think of 10 others who would press the cash register if they got anything resembling a compelling offer. But a “compelling” offer is a very subjective term. For years, sellers sought anywhere from five to 10 times revenues. Today most ad networks are lucky to get two times revenue. Content firms can command three to five times, while tech firms in the online video space still aim for a multiple of five, or more.
That’s the theory. One reason why valuations are going down, and not up, despite the “future of media is video” rhetoric is the structural issues facing video companies. There have been no shortage of critics of my company’s licensing-centric revenue strategy. To be fair, licensing is a very limited strategy relative to an open, ad-supported model. Odd thing is, every dollar in licensing revenue is basically pure profit, but no one will really attribute it a higher multiple, because everyone has Google envy (to build the next great ad platform). However, while ad-supported models represent the holy grail, that trail is littered with the carnage of many who have failed.
Moreover, most publishers and producers that have embraced an ad-supported model have in turn become ad networks -- thereby with very limited multiples. After all, publishers can secure the ad campaigns -- but lacking video inventory, they need to build a publisher network, while producers lack owned-and-operated traffic, so they too need to rely on an ad network-esque model. This means a downward pressure on margins and multiples.
Nonetheless, as much as I’ve hesitated to do so, I now find myself tempted to walk down the plank and jump off the bridge -- -pursuing an ad-supported model at any cost -- because that’s what everyone expects us to do.
In any case, while there will be instances where similar companies will merge in order to find efficiencies, increase revenues, reduce costs and boost margins, it remains unclear if horizontal integration will prevail for most -- because you can’t cut your way to a billion dollar exit.
Argument for Vertical Integration
This doesn’t make the case for horizontal integration any less valuable, but in order to really drive up margins, thus multiples and value, then you might want to look for vertical roll-ups, where (for example) a large publisher acquires a video content creator and/or a company with reach and distribution to enhance margins, multiples and value. This is unlike simply combining two similar companies with reach, where you are increasing revenues and possibly reducing some costs, but still incurring a lot of content licensing and traffic acquisition costs.
It’s unclear if any of this mumbo jumbo will pan out, but the theory is sound and arithmetic augments basic common sense. Whether or not it materializes remains to be seen.